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Tata Steel: Europe turns around - Views on News from Equitymaster
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Tata Steel: Europe turns around
Aug 13, 2010

Tata Steel has announced its 1QFY11 results. The company has reported a 17% YoY growth in topline during the quarter while its bottomline has turned positive. Here is our analysis of the results.

Performance summary
  • Consolidated topline grows by 17% YoY during 1QFY11 due to the significant turnaround in European operations.
  • EBITDA margins turn positive in 1QFY11.
  • Other income declines by 71% YoY during the quarter.
  • Bottomline turns positive in 1QFY11 due to higher operating margins, lower interest cost and restructuring charges.
  • On a standalone basis, the company registers a 17% growth in its topline and a 100% YoY growth in its bottomline during the quarter.


Financial snapshot
  Standalone Consolidated
(Rs m) 1QFY10 1QFY11 Change 1QFY10 1QFY11 Change
Net sales 56,156 65,515 16.7% 232,923 271,948 16.8%
Expenditure 38,733 36,350 -6.2% 233,222 227,622 -2.4%
Operating profit (EBDITA) 17,422 29,165 67.4% (299) 44,326  
EBDITA margin (%) 31.0% 44.5%   -0.1% 16.3%  
Other income 463 484 4.5% 2,039 595 -70.8%
Interest (net) 3,422 3,277 -4.2% 8,819 5,976 -32.2%
Depreciation 2,532 2,802 10.7% 10,890 10,439 -4.1%
Profit before tax 11,932 23,570 97.5% (17,968) 28,505  
Extraordinary income/(expense) - -   (2,188) (599)  
Tax 4,034 7,776 92.8% 2,229 10,005 348.8%
Net profit/ (loss) before minority 7,898 15,794 100.0% (22,385) 17,902  
Minority interest - -   212 (65)  
Share of profit of associates - -   86 416 381.0%
Net profit/(loss) after minority 7,898 15,794 100.0% (22,087) 18,253  
Net profit margin (%) 14.1% 24.1%   -9.5% 6.7%  
No. of shares (m)   887.4     886.7  
Diluted earnings per share (Rs)*   65.8     22.8  
Price to earnings ratio (x)*   8.1     23.3  
On a trailing 12 months basis

What has driven performance in 1QFY11?
  • Tata steel reported a 17% YoY growth in consolidated topline during 1QFY11. Total deliveries for the group rose 13% YoY to 6.05 m tonnes in 1QFY11 reflecting the recovery in global steel markets.

  • European demand has improved in sectors like automotive and aerospace. It has resulted in higher selling prices. The improved demand conditions also resulted in an improved capacity utilisation in Europe. Profitability also improved from the fact that the full impact of recent raw materials price hikes is yet to be felt. However, the long-term sustainability of the recovery is highly dependent on future growth in the European construction sector.

  • On the domestic front, the full 6.8 m tonnes per annum capacity will be available during the fiscal. The 3 m tonnes expansion at Jamshedpur is on schedule. Despite the recent surge in imports which have affected domestic sales, demand continues to be strong primarily led by the automotive sector.

  • The companyís operating margins turned positive primarily led by a 11% decline (as a percentage of sales) in raw material costs.

    Consolidated cost break-up
    (Rs m) 1QFY10 1QFY11 Change
    Raw materials 83,871 68,842 -17.9%
    % sales 36.0% 25.3%  
    Purchases 34,986 34,639 -1.0%
    % sales 15.0% 12.7%  
    Staff cost 39,625 37,771 -4.7%
    % sales 17.0% 13.9%  
    Freight and handling 11,599 15,861 36.7%
    % sales 5.0% 5.8%  
    Purchase of power 9,651 9,713 0.6%
    % sales 4.1% 3.6%  
    Other expenses 53,490 60,796 13.7%
    % sales 23.0% 22.4%  
    Total cost 233,222 227,622 -2.4%
    % sales 100.1% 83.7%  

  • Tata Steelís interest cost declined by 32% YoY due to lower interest charges on variable elements of senior debt facilities and repayment of debt at Tata Steel Europe.

  • On July 23, 2010, 15,000,000 ordinary shares of Rs 10 each, at a premium of Rs 584 per share, and 12,000,000 warrants, at Rs 594 per warrant, were allotted to Tata Sons.

  • The Tata Steel groupís liquidity position (including undrawn credit lines) on 30th June, 2010 stood at Rs 133 bn. Its net debt on that date stood at Rs 457 bn.

What to expect?
At the current price of Rs 531, the stock trades at a multiple of 0.8x its expected FY12 standalone book value per share. With the signs of turnaround with respect to Corus operations, we remain positive on the stock from a medium term perspective.

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